Are Nigerian Bonds, Treasury Bills Good for Investment?
A little coverage against Nigeria’s rising headline inflation rate could be significant in protecting high-net worth individuals that seek to protect their wealth rather than taking extra risks. Generally speaking, investment in naira assets has greater exposure to inflation, and falling local currency.
Market data shows that the average yield on the Federal Government of Nigeria bond has increased to more than 12% after an interest rate hike, though below the nation’s galloping inflation, it is still a window to protect the inflationary mosquito from entering finances.
To be candid, fixed interest securities like Treasury Bills, and corporate and government bonds is not for hustler – or an investor seeking alpha profit. Did I just say alpha profit? Forget that in the fixed income market. However, a risky investment could as well turn to alpha losses – Now, investment choice depends on your appetite.
How do bondholders make money from buying and selling Nigerian government instruments? At MarketForces Africa’s financial literacy seminar held in Lagos and Abuja in the past week, questions keep coming around Treasury bills, Stocks and Federal Government bonds including cryptocurrency.
Though real returns on fixed interest securities are in negative territory due to rising inflation rate that has overshadowed the rate, FGN bonds still provide moderate cover for your money.
It is important to note that Nigeria’s hot red inflation rate of 19.64% is a red signal for your finances. Everyone is affected but some people have investment-related cover while others tremble. READ: Treasury, FGN Bond Yields Rise over Weak Liquidity
Buying FGN Bonds creates contracts between those that have extra naira they want to keep away for a while and the Nigerian government that need money to close its financing gap. Simply put, a Bond is a long-term instrument used by government and companies to raise money from the debt capital market – not a physical place per se.
The deals are often sealed by an exchange of documents via registered investment firms – stockbrokers, asset managers and other intermediaries that have been licensed by the Securities and Exchange Commission. Don’t be surprised, most financial assets are typically paper documents signed, sealed and delivered from a seller to a buyer at a consideration – investment outlay.
It is a financial instrument for risk-averse investors. That is why Pension Fund Administrators are active players in the FGN Bonds market. Why? Pensioners’ funds cannot be gambled in an investment window with an uncertain outcome!
Then, how do Bonds differ from Treasury bills? Nigerian Treasury bills is a short-term instrument used by the government to access funds from investors. So, if you feel investing in three or more years is not your thing, you will simply buy Treasury bills for a 364-day maximum.
For example, investors can buy a 10-year, N100,000 bond paying 10% interest. The crux of this investment is that FGN will pay you interest on that N100,000 every six months and then return your N100,000 after 10 years. You will collect N10,000 twice in 12-month as interest.
If you decide to sell your fixed income securities before 10 years, you can sell off your bond paper in the secondary market to another investor for the face value. The Nigerian government’s obligation is to pay an interest rate and pay the principal. Whatever that happens in between is in the secondary market for trading existing instruments.
Making money from selling
There are two ways to make money by investing in bonds. The first is to hold those bonds until their maturity date and collect interest payments on them. Note, interest on FGN Bond interest is usually twice a year. The second way to profit from bonds is to sell them at a price that’s higher than you initially paid. That can only happen in the secondary market.
Wait a minute, you may want to know this. If the Nigerian government need to raise money, Debt Management Office is responsible for borrowings on behalf of the government. Anytime you hear bond auctions, it means the government is raising funds or rolling over maturing bonds.
That being said, the bond instruments can be bought and sold in the secondary market. It happens that first buyers may need quick cash, and thus have to dispose of their financial assets to raise immediate cash.
And an investor that has cash to lock down in relatively risk-free investment, then exchange his or her cash and collect your bonds paper at the market rate. Here is the thing, you can get FGN bonds in the secondary market at a discount, par or premium – all these going rates have impacts on yields or return on investment.
For example, if you buy N100,000 worth of bonds at face value — meaning you paid N100,000 — and then sell them for N110,000 when their market value increases, you can pocket the N10,000 difference.
Bond prices can rise for two main reasons.
In the case of corporate bonds, if the borrower’s credit risk profile improves, they’re more likely to be able to repay the bond at maturity. Investors would like to be part of cake sharing, demand for the corporate bonds will increase and then the price would typically rise.
Forces of demand, as usual, always force an adjustment since they are instruments for allocating scarce resources.
Also, if prevailing interest rates on newly issued bonds go down, then the value of an existing bond at a higher rate goes up. Yields, or the interest rate a bond pays, and bond prices tend to have an inverse relationship, meaning they move in opposite directions.
If prevailing interest rates increase, prices for existing bonds are likely to fall because the coupon it offers is less valuable compared to new bonds.
After the Central Bank interest rates in May and July 2022, the average yields on fixed income instruments have inched higher, which means that bond prices have generally gone down. Should you buy it? You may need to speak with:
Meristem Securities
CardinalStone
Vetiva Capital
Afrinvest
WSTC Securities
ARM Securities
Cordros Capital
